UPS Inc. and FedEx Corp. have begun to take market share from their regional parcel delivery rivals by leveraging generous price discounts, according to sources.
Share-taking between regional and national carriers is nothing new. However, the aggressiveness of the national carriers is different than it has been in the past, the sources said. Among shippers who’ve defected, according to a top regional carrier source, are Gap. Inc, (NYSE: GPS); Williams-Sonoma, Inc. (NYSE: WSM), French retailer Sephora, a unit of LVMH (OTC: LVMUH), and Nordstrom Inc. (NYSE: JWN).
Much of today’s shifting is playing out in a climate of excess capacity, a scenario not seen since before the pandemic. The level of switching wouldn’t be as high if markets were tighter, according to one of the sources.
Satish Jindel, president of ShipMatrix Inc., a consultancy, agrees that overcapacity rules the parcel market. For one, the U.S. Postal Service operates at just 55% of its published capacity of 60 million daily parcels, according to ShipMatrix data. FedEx, which publishes its fiscal 2023 third-quarter report on Thursday, likely will confirm that volumes will remain weak, Jindel said.
“The market will remain in this state of imbalance for the rest of 2023 and into 2024, so we expect carrier surcharges implemented during the past three years to be under further pressure from shippers,” Jindel said.
Another issue is that since the pandemic, the market has been saturated with dozens of parcel carriers of different sizes. While this may be a positive trend for shippers, it has raised familiarity issues with consumers who are not aware of, or comfortable with, most of the new carriers, a source said.
“Price being equal, shippers would much prefer UPS (NYSE: UPS) and FedEx (NYSE: FDX) because consumers are not big fans of regional carriers they aren’t familiar with,” one source said.
In general, regional carriers will underprice the national carriers because of the regionals’ lower overhead. The gap can become wider should shippers defect and lose the volume-based discounts that had been granted by FedEx and UPS.
The pendulum can swing the other way, though, as it appears to be doing today. As shippers return more parcels to the national carriers, they become eligible for price breaks they may have relinquished when they bolted. This creates a big incentive to switch carriers.
One of the sources said that service consistency, real or perceived, has become a factor in shippers’ decisions to defect.
A potentially risky byproduct of shippers returning to UPS is the question of whether their traffic would be stuck should the Teamsters union decide to strike the carrier by Aug. 1 if a new collective bargaining agreement is not agreed to by the current expiration date of July 31.
In a statement, UPS said it “competes daily for package volume that aligns with our network capabilities and gives us a chance to add value to new and existing customers.” FedEx did not respond to a request for comment.
Negative report from Moody’s
Issues with the staying power of regional carriers surfaced earlier this month when Moody’s Investors Service downgraded the debt ratings of the nation’s largest regional carrier, which is now known as OnTrac following a rebranding earlier this year.
In the report, Moody’s lowered the corporate rating of LaserShip — it did not use the rebranded name — to Caa1 from B3 and the probability of default rating to Caa1-PD from B3-PD. Moody’s describes a Caa rating as being given to companies that are “of poor standing … and high credit risk.”
The company was formed out of the 2021 merger of Eastern carrier LaserShip and OnTrac, which operates out of the western U.S., by private equity firm American Securities LLC. The goal of the acquisitions was to create a third business-to-consumer (B2C) national delivery network to compete with the national carriers.
According to one of the sources, American Securities paid hefty sums for both companies and entered the integrated era “levered for perfection.” It hasn’t gone perfectly. Excess capacity and soft demand have left the company with “very high financial leverage, weak liquidity and moderate scale in the competitive e-commerce residential delivery market,” according to the Moody’s report, which was published March 2.
The report came a day after LaserShip-OnTrac CEO Mark Holifield resigned unexpectedly after 17 months and was replaced by Jim Duffy, who is currently CEO of FleetPride, touted as the nation’s largest distributor of truck and trailer parts. The Moody’s note made no mention of the change in the C-suite. However, the two acquisitions and the subsequent leverage that was built up were not on Holifield’s watch, according to one source.
In the report, Moody’s said it expects LaserShip’s leverage to remain very high and liquidity to remain weak through 2023. LaserShip’s network capacity growth in 2022, spawned by its late ’21 acquisition of OnTrac, enabled it to operate successfully during the ’22 peak season, according to Moody’s. However, package delivery volumes were less than expected in the second half of 2022, which impacted earnings for the year.
Consumer spending in general will remain subdued, which will affect delivery volumes across the industry. LaserShip should see some volume improvement through the year as its network grows and it adds customers. However, higher interest costs and softer volume growth will constrain the company’s ability to meaningfully improve operating leverage and result in negative free cash flow in 2023, Moody’s said.
The negative outlook “reflects the risk that LaserShip may be unable to “improve earnings or reduce its cash burn over the next 12 months given a weaker macroeconomic environment,” Moody’s said. Prolonged weakness will “increase the risk that the company’s capital structure is unsustainable at currently very high leverage levels,” according to the report.
The agency added that, as a result of these developments, LaserShip’s ability to “absorb adverse operational developments” may be limited.